Leasing which was once the tool of business people who could write off their monthly lease payments as a business expense has attracted the interest of private car buyers. High sticker prices have put many new car models beyond the reach of ordinary consumers. In addition, the tax deduction is gone for both sales tax and interest paid on consumer loans.

In many cases leasing is cheaper than buying. For those who keep a car for three or four years, leasing is even more competitive than financing because depreciation makes a new car very expensive to own in its early years. A typical new car may depreciate almost 50% in its first year and as much as 75% over four years.

The cheapest way to own a car is to buy it and keep it to a ripe old age. If a car is kept for ten years, the percent of depreciation will be much lower per year than a four-year loan. Although maintenance costs will increase as the car grows older, it should not surpass the higher depreciation that occurs when buying a new car every few years.

Unfortunately, keeping a car for ten years does not seem to be the American way. People's needs and wants changing often, along with manufacturers improvements are just a few reasons why people get a new car every few years.

How to determine payments

To figure your monthly lease payment, the leasing company first determines what the car is expected to be worth at the end of the lease period, or the car's "residual value." The lease company subtracts the residual value from the purchase price of the car, and builds the monthly lease payments on the remainder. For example, you lease a $13,000 automobile for four years. If the leasing company estimates that the car will be worth $5,000 at the end of the lease, it must arrange a lease payment schedule to recover the $8,000 difference, along with interest and tax. The lessee might also have the option to purchase the car at the end of the lease period for the residual value or purchase option. It would be to the customer's advantage to use a leasing company that works with all makes and models due to their unbiased opinions in comparing different makes and models.

Types of leases

The most common type of lease is the "closed-end lease." You pay a fixed price for a fixed number of months. At the end of the lease you return the car and walk away. You owe nothing, unless you have damaged the car or have driven more than the agreed mileage.

A second type of lease is called the "open-end lease." At the end of an open-end lease, you can buy the car for an amount established by the leasing company at the time you sign the contract. If you don't wish to buy the car at the end of the lease, you can ask the leasing company to sell it. If the car sells for more than the price originally established by the leasing company, you either owe nothing or get a refund, depending on how the lease was written. If the car sells for less than the original estimate, you pay the difference between the estimated and actual price of the car.

In most cases, the Consumer Leasing Act of 1976 limits this end-of-lease payment to three times the monthly payment. The leasing company can collect more only if the car suffered excessive use or damage, or if the leasing company wins a lawsuit seeking a higher amount.

Because you the consumer assume some of the risk of depreciation with an open-end lease, the monthly payments are usually lower than with a closed-end lease. Nevertheless, that risk of depreciation is no small matter.

Whether you sign an open-or a closed-end lease, you will be responsible for the following expenses, some of which are negotiable:

Security deposit -- Most leasing companies require a security deposit equal to one or two months' payments. In most cases, you get the deposit back (usually without interest) at the end of the lease. Providing the car is in reasonable condition.

Advance payment -- You'll probably have to pay the first monthly payment in advance. Some companies require two or more payments up front.

Title and registration -- The car must have a title and registration; most leasing companies will pass these charges on to you. The costs differ from state to state.

Monthly payments -- The leasing company calculates your monthly payments based on the estimated value of the car at the end of the lease, the company's borrowing costs, overhead expenses, sales tax, and their profit. Most leases run for 36 or 48 months. Monthly payments on a four year lease are usually 10-15 percent lower than payments on a three year lease.

Sometimes companies offer to cut your payments if you trade in your current car. Don't do it if you can avoid it! Sell your car privately. Remember that to stay in business they must pay you less than your car is worth (so they can sell it for what it is worth or more and make a profit).

Insurance -- You'll also have to have insurance on the car. Most leasing companies set minimum limits that are higher that those normally required.

Some leasing companies even offer insurance. While buying insurance from the leasing company might seem convenient, it's wise to shop around and compare prices from several different insurance companies.

Maintenance and repairs -- The customer is responsible for the car's maintenance and repairs. In some cases for an additional monthly fee, the leasing companies will cover all or part of maintenance. The Consumer Leasing Act requires companies to disclose any warranties provided by the car manufacturers and to tell you if any additional warranties are available.

In some states, you also have protection under state lemon laws, which cover new cars that turn out to be nightmares. According to most state laws, a car is a lemon if it has been taken in for repair of the same problem four times without success during the first 12,000 miles (19,00km) or one year (this varies, state-to-state), whichever comes first, or if the car has been out of service at least 30 days. If you have a lemon, the prescribed remedy is a new car or your money back.

Forty-three states have passed lemon laws, but in only 16 states and the District of Columbia do such laws apply to leased cars. Those states are: California, Delaware, Florida, Indiana, Maine, Maryland, Minnesota, Mississippi, Missouri, New York, North Carolina, Oregon, Tennessee, Virginia, Washington, and Wisconsin.

Disposition charge -- You are not responsible for the sale of your car after you return it to the leasing company, however some companies include a disposition charge to cover the costs of preparing the car for resale. This bill includes expenses for detailing, tune-up, and final maintenance. It usually comes to about $150 but can be as high as $250.

Purchasing Options -- This option gives you the right of first refusal to buy the car at a set price at the end of the lease. For a closed-end lease, you must have the option to buy in writing. For an open-end lease, the option to buy is usually part of the contract.

Mileage charge -- Most leases allow you to drive only a certain stated number of miles, usually about 10,000-12,000 miles (16,000-19,000km) per year. If you drive more, you'll have to pay a mileage charge usually specified in the lease. Most of the leasing companies charge 15 cents per mile, but some charge as much as 25 cents per mile.

Wear and tear -- When you return the car you will have to pay for any damage, missing equipment, or excessive wear and tear. The Consumer Leasing Act requires the leasing company to define unreasonable damage, but the language is often vague. If the lease is unclear, ask for a detailed description of the damage you're responsible for.

Early termination -- The Consumer Leasing Act requires the company to tell you under what conditions you can get out of the lease early and what the penalties will be, but it does not limit the penalty. The sooner you break a lease, the stiffer the penalties could be.

In the beginning of the lease, the car depreciates more than the amount covered by your monthly payments; quitting early means that the leasing company will consider you "upside-down" on the lease. Therefore, it levies an early termination fee to make up for the shortfall in your payments. Early termination fees usually range from three to six months worth of but can run much higher. Check with you leasing company about simple interest leasing, this could be the safest type of auto leasing.

How to shop for a lease

You can lease from a dealer who sells the make you want, or you can choose from most any make and model by shopping at an independent leasing company. Carefully compare both the total price and terms of each lease; make sure you are comparing apples to apples.

Monthly car payments for identical cars can vary from one leasing company to the next, since the companies' costs may vary -- one may have bought the car for a lower price, for example, or another may have arranged more favorable financing. Most companies finance their cars through banks or financial institutions just like you do.

Be cautious of ads for super-low monthly rates. Some leasing companies advertise suspiciously low monthly payments, but then demand a "capital cost reduction" payment in order to get that lower monthly rate. In this case, they are having you buy down the lease without realizing it. Since avoiding up-front expenses is one of the main advantages of leasing, it doesn't make sense to pay the equivalent of a down payment.

Accident coverage

When you lease a car, you're required to carry automobile insurance. Most people assume that their insurance will cover the cost of the car if it is stolen or totaled in an accident before the lease expires. To the surprise of many unhappy leaseholders, this isn't always the case.

Many leasing companies consider a stolen or totaled car as "early termination." Then they slap lease holders with penalty fees in excess of the amount paid by their insurance companies. A recent report cited a New York businessman, who leased a Jeep Cherokee worth about $18,000. Eight days after he drove it off the lot, the car was stolen. His insurance company reimbursed the leasing company for the cost of the car, but he later received a bill for more than $7,000. This is where a simple interest lease would have been a good idea.

Before signing anything, examine every line of the lease and compare all the different aspects, not just price.

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